My teenage student daughter, who is almost 16, is earning pocket money by casual busking, probably a few thousand dollars per year.

At what stage should she start declaring income for tax purposes? And being self-employed, will she have to put in an IR3 return, with the associated record-keeping, showing expenses, etc?

What would be pros and cons - long term - of including her valuable instrument as a depreciating item in such records?

I'm shocked to learn that - in theory at least - your daughter should have been sending in a tax return from the word go.

"The tax legislation is written in such a way that would mean anyone receiving even $1 of business income is required to file a tax return," says an Inland Revenue spokesperson. And that applies regardless of age.

"In practice, though, many people who earn only a nominal amount of income do not file a return and Inland Revenue does not put resources into policing returns where there would be no or very little tax to pay." Phew.

However, your daughter is well beyond the first dollar stage, so she should keep track of her earnings, as well as any business-related expenses, with receipts.

Inland Revenue has set up a website, www.whatstax.govt.nz, aimed at young people. Click on "Things to know when earning money" and then "work for yourself" for info on filing an IR3 return.

The website also includes guidance for young employees who pay PAYE tax and points out that some will be due refunds. It's worth looking into.

Both self-employed people and employees should check out the tax credit link. The tax credit most likely to help your daughter and other teens is the tax credit for children.

To be eligible, you must be either under 15 or under 19 and still at school at any time during the April-March income year. The tax credit applies to income earned from working, but not to interest, dividends or Maori Authority distributions. Through the credit, the first $2340 earned in any year starting April 1 is tax-free.

You might conclude that if your daughter earns less than $2340, she should just not bother with the whole thing. However, I'm told, if a taxpayer believes they are entitled to a tax credit they need to go through the tax process to claim it.

For info on depreciation, see www.ird.govt.nz. But it might not bring you much joy. "Depreciation is based on historic cost," says the Inland Revenue spokesperson. "If the taxpayer did not pay for the instrument themselves, there is no cost to them, so no depreciation." That might count your daughter out.

Even if it doesn't, depreciation has to be apportioned between private and work use. "Since I would guess that private use would be considerable (such as use in school), any depreciation claim may be minimal," says the spokesperson.

It all seems horribly complicated for a young busker. I guess that's what happens when you join the adult world. Still, a bit of help from Dad probably wouldn't go amiss.

High-risk KiwiSaver

I have been in KiwiSaver for three years. About a year-and-a-half ago, I changed to the Fidelity Options fund as that was one of the better performers.

I checked my statement recently and, about halfway through August, the unit price dropped significantly, wiping about $2500 off my balance. Months of contributions and the tax credit all gone at once. It has since recovered a little bit, currently showing an investment movement of minus $2100.

What would you recommend I do? Just hang in there and wait for the sharemarket to improve and accept that there will be movements like this one, or cut my losses and move it to a less risky fund?

I'm afraid this is a textbook example of how not to choose your KiwiSaver fund. Please repeat after me: "I will never again choose a fund based on its past performance."

Okay, I'll get off the lecturer's podium. But the oft-repeated "past performance is no guide to the future" is oft-repeated for good reason.

In fact, funds that perform particularly well tend to be more likely than moderate performers to do particularly badly in the next period. That's because high performers are usually high-risk funds - often good long-term performers, but with some big downs along the way.

Your comment about the sharemarket shows how little you know about Fidelity Life's Options Kiwi Fund. It doesn't invest in shares, but "short-term fixed interest investments, used as security for issuing derivatives (selling put and call options contracts)", says the investment statement and application form.

It also says the risk profile is high, and that the options fund may suit "investors with a seven to 15-year time frame who are looking to earn above-average returns and are willing to accept significant market volatility and losses that may occur from issuing options on the US and other government bonds".

This information is not buried in the document, but placed clearly on page 4. Sorry, but you have only yourself to blame for not reading it.

Basically, the fund offers a sort of insurance to banks against interest rates moving up or down too much, which could make life difficult for the banks. The banks pay premiums to the fund and get money back if interest rates move more than a set amount.

When interest rates are calm, the fund grows from the premium income - as well as some interest earned on deposits. When interest rates are volatile, the fund pays out more than it gets in - sometimes lots more.

"The significant movement you saw in August was due to the unexpected large fall in US interest rates after the United States credit rating downgrade was announced at the beginning of August," says a Fidelity spokesperson. "This resulted in a large investment loss for the month of August.

"However, September saw positive returns and October looks likely to as well. With enough time and steady gains, even a big loss can be recouped. But, as stated, the future is uncertain so there can be no guarantees."

As I say in The Complete KiwiSaver: "This is the kind of fund that somebody who could afford to lose a third - maybe even more - of their money might dabble in - in the hope that the opposite happens and they do extremely well over the long term, which is also possible. It's not a fund for the faint-hearted."

What should you do from here? There are two good options:

* Learn more about the fund from Fidelity Life's website. If you then understand what you're in and think you can live with high volatility - and you're not expecting to withdraw KiwiSaver money for 10 years or more - you could stay in the fund and hopefully enjoy the wild ride.

* If you can't cope with considerable losses, switch to a middle-risk balanced fund or even a lower-risk conservative one offered by either Fidelity Life or another provider. The lower the risk, the smoother the ride, but you will probably end up with less growth over the long term.

Oh, and don't fret too much over your dabble in a high-risk fund. Be thankful you learned the downside of risk in your early days in KiwiSaver, when you didn't have huge amounts to lose.

Freedom of speech

Just to say I loved the Voltaire quote last week, in relation to the 99 per cent protests, which I have struggled with in terms of their not being "outcome-based". But your putting it that way helped enormously. Much appreciated. So very apt.

Thanks. For anyone who missed the quote, Voltaire said: "I do not agree with a word you say, but I will defend to the death your right to say it". As I mentioned last week, it's inscribed in the lobby of the Chicago Tribune - along with many other quotes about freedom of speech. They are worth seeing if you are in Chicago. I found it inspiring to pass by them each morning before trudging up the stairs to write about a company's profits or a change in tax law - the everyday stuff of journalism.

Odds of rest-home care

Never did I imagine that I would be able to answer a question of yours. But I notice that in your article of October 15 you talk of the difficulty in finding information about residential care for the elderly.

This is a topic that our geriatric medicine group at the University of Auckland has recently researched. The rates of use of residential aged care (RAC) at any one time are indeed a little under 6 per cent of the over-65s and very related to age. In the 2006 Census, 1 per cent of those aged 65 to 74, 6 per cent of those 75 to 84 and 21 per cent of those over 85 were living in RAC.

That also varies by gender: 29 per cent of women over 85 and 10 per cent of men over 85 were in RAC.

In Auckland, use of RAC has fallen markedly in the past 20 years. We believe this is largely due to the introduction of compulsory needs assessment before admission and increased provision of home-based support services.

The rise of retirement villages is also likely to provide lifestyle options. In Auckland, there are now more living in retirement villages than in RAC.

To find the proportion of people who "ever use" RAC, we obtained information about where people die (from the Ministry of Health).

Classification is tricky, but it seems that of all people over 65 who died in 2003 to 2007, 38 per cent died in RAC. This proportion rises from 17 per cent at 65 to 74, to 55 per cent at over 85.

Further, in the same period, 34 per cent died in an acute hospital. If, say, one in four of these were admitted from RAC, more than 45 per cent will have used RAC in their lifetime.

We found the numbers of deaths in RAC surprising and made some international comparisons. Of 21 other countries, New Zealand was highest for RAC, but lowest for hospital deaths.

Regarding insurance for long-term care, there are countries that use an insurance model, including Germany and Japan.

We understand that the US also has private insurance schemes.

Interesting stuff. It seems that if we make it to 65, there's close to half a chance we will end up in a rest home or similar. And the older we live the higher the chance. Your numbers are a lot higher than some others, but you have done the research to back it up.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.